The company will be well positioned to sustain low advertising ratesdue to its low expense base which will provide competitive advantage. This is of particular importance amid the doubts of effectiveness of social media ads. Thecompany will be able to compete better given its low price.Facebook also enjoys strong cash flows.
The company’s operating cash flow
margin in FY2011 was 41.7% which is higher than 38.4% in Google during thesame year. High operating cash flow margin at Facebook reinforces the earningsquality as it indicates that the company is able to effectively convert sales intocash. Furthermore, the company converted 12.6% of its sales into free cash flow.
The ratio of free cash flow to sales is a measure of how much of a company’srevenue is transformed into cash. The company’s high cash flow generation
capability indicates that the company enjoys high financial flexibility. Facebookfaces several challenges in terms of monetizing its reach and drive revenues.
The company’s free cash flow position enables it to invest in expansion
inorganically. Facebook will be able to fund its expansion plans at feasible rates.